What Are the Benefits of Indiana's 529 Savings Plans?
Families putting together savings for future education costs often consider 529 plans, also known as "qualified tuition plans." These are tax-advantaged savings plans sponsored by states, state agencies, or educational institutions and authorized by Section 529 of the Internal Revenue Code.
Indiana's CollegeChoice 529 Savings Plans offer additional benefits, including tax credits for contributors to the funds. Starting in 2019, these plans and tax credits began to include contributions intended for K-12 tuition in addition to those for higher education.
Benefits of 529 Plans
With a 529 plan, families can begin contributing to a child's education fund as soon as the baby is born. Through regular contributions from parents, family members, and friends, the account grows over time, until there is enough to fund the child's education. If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships.
Beyond savings advantages, 529 plans also offer significant tax benefits as well. Investments made in these accounts will grow free of federal and state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal income tax. In some states, such as Indiana, contributors also get a tax credit.
Benefits Specific to Indiana
The Indiana General Assembly adopted a bill in May 2018 that allows taxpayers to use their 529 plan savings to pay for K-12 education tuition. Previously, "qualified withdrawals" from 529 plans only included expenses related to higher education.
Taxpayers in Indiana who contribute to its CollegeChoice 529 Savings Plans can get a credit of 20 percent of their contribution, or up to $1,000, as a tax credit. Starting in January 2019 for the 2018 tax year, taxpayers can claim 10 percent of K-12 plan contributions, limited to $500. For the 2019 tax year, K-12 plan contributions will get the same credit as post-secondary contributions.
This can be a beneficial way to lessen what you owe during tax season. Taxpayers claiming a state tax credit on contributions must keep the account open for at least one year to avoid recapture of the tax credit on distributions used to pay qualified education expenses.
Indiana's CollegeChoice 529 Savings Plans Options
The state of Indiana offers several options for forming a 529 plan.
The Direct Savings Plan is offered directly from the state. It offers an age-based option and several static options. This plan has higher fees than the national average, but it has an established history of good returns.
The Advisor 529 Plan is sold exclusively through an advisor. There are age-based and static options. If you choose an age-based option, it starts out aggressively, with most investments in stocks. As the child ages and gets closer to college, the investments get more conservative to protect the money contributed. This plan does have fairly high fees, but with the tax credit and strong returns, this is still an excellent choice for investing.
Four FDIC-insured options are offered in this plan:
- The CollegeSure CD with a variable interest rate pegged to a private-college tuition index
- The InvestorSure CD with an interest rate pegged to a percentage of the increase in the S&P 500 Index over a five-year period
- Fixed-Rate CDs with one-year or three-year maturities
- The Honors Savings Account, which is a high-yield savings account available from College Savings Bank, a Division of NexBank SSB
The minimum contribution to get started with a CollegeChoice 529 Savings Plan is very low—just $25. This allows families to get started even with modest funds. In Indiana, 529 plans can have a maximum of $298,000. Anyone over the age of 18, who is either a U.S. citizen or legal resident, can make contributions to a plan, even if they live outside of the state.
Indiana does not have age restrictions, nor does it require a student to attend college within a certain amount of years after graduation. If your child decides to work for a few years before going to school, the 529 plan will stay in place for their use. If your child decides they don't want to go to college at all, the savings can still be used.
You can change the plan's beneficiary at any time, so you can give the money to a sibling, niece or friend for education expenses. If you withdraw the money for your own needs, outside of education, there may be substantial tax penalties. This decision should be made with care, as the penalties and taxes can take up a significant chunk of your savings.